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Elon Musk’s April Fool’s Joke, May Not Be A Joking Matter

Tuesday, April 3rd, 2018

On the cherished holiday of April Fools, Elon Musk took to Twitter to post a joke about Tesla filing bankruptcy. While he remains optimistic about the future, cash flow and earnings will need to be a part of the business model at some point to carry out his vision.

Tesla has run into a variety of problems recently which includes investigations around its autopilot feature, recalls, and shortcomings of its production targets on the Model 3. All of these issues create potential problems as it relates to cash flow and earnings.

This year it appears as if time could be ticking for the company to turn cash flow positive. Tesla ended 2017 with $3.4 billion in cash or cash equivalents, but the problem is the company burned through $3.4 billion in cash after its capital investments. If the company follows a similar path to last year, it would be completely out of cash come December 31st, 2018. This does not include the fact that Tesla has $230 million in debt due November 2018 and an additional $920 million due in March 2019.

Even though the picture looks gloomy for Tesla, the company has come out and said it will not need to tap capital markets this year for funding purposes. Unfortunately, one may want to question the company’s word as it has continuously fallen short on targets it has given investors. The latest miss was the guidance for its weekly Model 3 production. The company had guided for 2,500 model 3s to be produced by the end of Q1, but the final number was 2,020. This is nearly 500 cars or 20% below its initial promise. After failing to reach the Q1 target, Tesla has issued a new promise of 5,000 Model 3s per week by the end of next quarter.

The issue with ramping up production at such a rapid rate circles back to the problem of cash flow. Doubling the production target should require additional capital expenditures and without cash to fund the capex, it could be difficult to meet those targets.

Another potential issue is suppliers could become worried about Tesla’s ability to pay and demand cash instead of allowing for an account payable. This could put Tesla in a cash crunch and could slow down production targets if there is a bottleneck in the supply chain.

If Musk goes against the company’s word of not needing additional capital, there could be issues obtaining that capital. Moody’s has downgraded Tesla’s credit rating to negative which could lead to high borrowing costs. If it explores the option of equity funding, investors may view this as a major concern and it could send the stock price drastically lower.

Tesla’s future remains questionable. If they cannot turn around their cash flow problems the high debt levels will cripple this company and I would not be surprised to see it file for bankruptcy within the next 12 months. While the car may remain, stockholders would lose everything. Be careful with this company as an investment as there is a lot of speculation involved with the future of Tesla.

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